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JOHN T NEWTH FCA, FTII, FIIT, ATT reports on TaxAid's recent Tax Essentials conference.
Speakers were John Dobing FRICS, Gerry Hart CTA (Fellow), ATT and Peter Gravestock FCA, FTII, ATT.
The conference notes can be purchased from TaxAid (Conference Department), Room 304, Linton House, 164-180 Union Street, London SE1, OLH.
JOHN T NEWTH FCA, FTII, FIIT, ATT reports on TaxAid's recent Tax Essentials conference.
Speakers were John Dobing FRICS, Gerry Hart CTA (Fellow), ATT and Peter Gravestock FCA, FTII, ATT.
The conference notes can be purchased from TaxAid (Conference Department), Room 304, Linton House, 164-180 Union Street, London SE1, OLH.
New tax credits
Peter Gravestock FCA, FTII, ATT considers that the new tax credits system is as large an innovation as VAT or self assessment. Many practitioners are quite unprepared for it, and this could have serious repercussions for two reasons.
Firstly, claims for the new credits must be made on form TC600 by 5 July 2003. Second, Peter considers that the whole focus of self-assessment enquiries into individuals in the future will be towards tax credit claims.
Effect of child tax credit
The new child tax credit brings together all existing support for families with children including the child element of income support, job seekers allowance, working families tax credit, disabled persons tax credit and children's tax credit. The credit will be paid to the main carer, usually the mother. The effect of removing child tax credit from a code number or self-assessment calculation will be to increase the tax payable under pay-as-you-earn from 6 April 2003 or to increase the self-assessed liability on 31 January 2005. In the worst case, where the taxpayer received baby tax credit in 2002-03, this will increase the liability by £1,573.50 on 31 January 2005.
Energy saving equipment
100 per cent first year capital allowance is claimable on energy saving equipment. This is worth considering, said John Dobing FRICS, because of the allowance granted, where the actual cost is higher than for other equipment. The allowance is not restricted to small or medium-sized companies, and the expenditure must be on new rather than secondhand plant.
Qualification is through description by Treasury order and there is a growing list of items. A good resource in this connection is the enhanced capital allowances scheme website www.eca.gov.uk.
Closing a company down
Once a company has stopped trading, the shares are no longer business assets for taper relief purposes, unless it can be shown that it is simply a lull in activity and the company is preparing to carry on a trade or acquire a trade.
When the company is to be wound up, or simply struck off the company register under section 652, Companies Act 1985 and the Extra-statutory Concession C16 route, the period of ownership will continue, but Gerry Hart pointed out that there will be a period when the shares are not a business asset unless it is possible to substantiate an argument that holding funds for distribution is a trading activity. Collecting debts and paying off creditors could be put forward as a continuing trading activity.
Problems with form TC600
Areas of concern in connection with form TC600 include gift aid and pension payments. For gift aid, the correct treatment is to deduct the grossed-up gift from the appropriate income. For gift aid, a basic rate taxpayer giving £78 to a charity, the position is as follows.
The charity receives:
Gift £78 Add tax repayment £22 £100 Cost to claimant is: Gift £78 Less increase in tax credit £37 £41
The effect on tax credit is to reduce income by the gross gift to charity and therefore reduce taper restriction by £100 x 37 per cent. If the claimant's income exceeded £50,000, the increase in tax credit would be £100 x 6.67 per cent = £6.67. However, higher rate tax may then apply, giving a net cost of £53 after taking into account higher rate tax relief of £18.
Form TC600 only refers to personal pensions, whereas all approved payments made by the claimant are deductible (gross). This includes retirement annuity contracts, stakeholder pensions, free standing additional voluntary contributions and pensions payments not deducted from salary, such as additional voluntary contributions paid gross but not relieved under the net pay scheme.
Taper of child tax credit
Taper will reduce working tax credit before child tax credit, thus reducing the amount paid by the employer. If no working tax credit or child tax credit is payable after taper, or is less than the family elements, then £545 a year (or £1,090 in year of birth) is payable until income exceeds the second threshold of £50,000 a year at which point it is tapered away at the rate of £1 for every £15 of further income, making a withdrawal rate of 6.67 per cent. This gives a cut off point of £58,175 or £66,350 in the year of birth.
Unlike the existing children's tax credit, which is payable in full where the higher earner has income of less than £34,515, the new child tax credit will be payable to families based on the combined income.
In addition, child tax credit is payable to those not working, certain students and others who are not entitled to working tax credit and are not receiving income support or jobseekers' allowance. Child tax credit is then payable in full provided their income does not exceed £13,230 a year. A withdrawal of 37 per cent of extra income then applies.
Example
Joe and Janet work full time and have two children. In 2001-02, Joe earned £10,400 and Janet £26,000. They pay eligible childcare of £180 a week. Their 2003-04 tax credits entitlement is:
Basic 1,526.22 Couple addition 1,500.60 30 hours/week 622.20 Childcare 70 per cent of £180/week 6,552.00 Child tax credit - two children 2,891.40 Family element 545.34 13,637.76 Restricted by £36,400-£5,060 = £31,340 @ 37 per cent 11,595.80 Tax credits £2,041.96
The credits will be paid to Janet at a weekly rate of £39.27.
Shares in a family company
Gerry Hart CTA (Fellow), ATT said that it should be remembered that there is a fundamental difference in the valuation of shares in a family company or owner-managed business, in terms of whether the issue is inheritance tax or capital gains tax.
For inheritance tax, the value transferred is based on the principle of the loss to the donor rather than the benefit to the donee. The former could be substantially greater, especially where a controlling shareholder transfers a small minority stake out of his holding and thereby loses control. This may have little consequence where business property relief is available, but it certainly has where the company is an investment company.
59 per cent relief as a non-taxpayer
A claimant has annual income of £12,000 (working 30 hours a week), and the spouse earns £4,615. They have two children. Tax credits due amount to £2,810.41 (no pension claim). Spouse pays a stakeholder pension of £65 (net) a month. The effect on the premium payments is:
Insurance company invests
(65 x 100 x 12) 78 £1,000 Cost to spouse £65 x 12 780 Less increase in tax credits 370 £410 Revised tax credit claim: Basic 1,526.22 Couple addition 1,500.60 30 hours a week 622.20 Two children 2,891.40 Family element 545.34 7,085.76 Restricted by: Income 16,615 Less pension premiums 1,000 15,615 Less 5,060 37 per cent x 10,555 3,905.35 3,180.41 Tax credit without pension payment 2,810.41 Increase re pension £370
Business losses
If a self-employed taxpayer suffers a trading loss, three separate loss claims will be required, as follows:
Income tax - claim under sections 380, 381, 385, 386 or 388, Taxes Act 1988 or against gains under section 72, Finance Act 1991.
Class 4 National Insurance - claim against income liable to Class 4 only under paragraph 3.3 of Schedule 2 to the Social Security Contributions and Benefits Act 1992.
Tax credits - claim against income of couple for year of loss only (Regulation 3(1) of Statutory Instrument No 2006 of 2002).
However a self-employed client has a problem. If a taxpayer with an accounts year end of 31 March suffers a loss due to the default of a major customer in March 2004, the latest date to claim is 5 July 2003 with final figures supplied by 5 July 2004. Accounts may not be available until the summer of 2004. A claim can be made for 2004-05, and tax credit will be paid, but it will then be revised to actual for 2004-05. An accounts year of 30 April would have been more beneficial in that case.
